Tax Brief - Australia's Future Tax System - 8 August 2017.pdf (1) (88 kb)
If the opinion polls are to be believed, and nothing remarkable happens in the next 18 months, the ALP will win the 2019 election. That makes their tax agenda worthy of attention, especially since it includes more than just the recent announcement about taxing discretionary trust distributions. Tax policies have cropped up in a variety of places – some policies released for the 2016 election campaign are apparently still alive, some appeared in November 2016, others were announced in reply to the Budget in May, some in Members’ speeches and some have just appeared as spontaneous Media Releases. This Tax Brief catalogues a few important policies and is based on the (often scant) details currently available.
Business tax issues
Interest deductions. The ALP is proposing to adopt a ‘worldwide gearing ratio’ rule of the kind that was examined (and abandoned) by the OECD during the BEPS project. Under the ALP policy, taxpayers would only be able to deduct in Australia a share of the group’s worldwide external net interest expense. The ALP announcement says that it simply gives effect to the worldwide gearing ratio regime, currently part of our thin capitalisation rules (and removes the safe harbour option and the arm’s length debt test). This will mean that the current 3:2 debt to equity safe harbour would no longer apply if the group’s external debt to equity ratio was (say) 1:9.
Corporate tax rate. In May, the Government introduced a Bill to try again to reduce the corporate tax rate for all companies to 25% by 2026. This measure was defeated in the Senate in March 2017 and the ALP has said it will oppose the measure when the second Bill is debated. The ALP has yet to declare whether it would try to repeal the corporate rate cut if the government manages to secure passage of this Bill on its second attempt.
MEC groups. The ALP would ‘remove [the] tax advantages and inconsistencies between Multiple Entry Consolidated Groups … and Australian-owned ordinary consolidated groups.’ This ALP policy would give effect to the recommendations of a 2015 Treasury discussion paper, Possible Options Identified in the MEC Group Tripartite Review which is discussed in our Riposte.
Disclosure of tax information. The ALP has announced that it will require the ATO to publish tax information about privately-held companies with an annual turnover exceeding $100m. When the measure was enacted in 2013, the threshold was originally set at $100m but it was increased to $200m as a result of amendments made by the Government in 2015.
Increasing the amount of tax-related information that is publicly available (particularly where tax havens are involved). In May 2017, the ALP released a broad suite of measures directed at increasing the scope of tax-related information that is publicly available:
- country-by-country reports will be released to the public, not just shared with other tax authorities;
- companies would have to disclose to shareholders – and label as a ‘Material Tax Risk’ – the fact that the company is doing business in a tax haven;
- the ATO would develop ‘guidelines’ for superannuation funds with investments in tax havens, presumably to discourage these kinds of investments by innuendo rather than law;
- AUSTRAC would be required to publish annually details of international cash flows;
- all firms tendering for Australian Government contracts worth more than $200,000 would be obliged to state their country of domicile for tax purposes;
- details of the beneficial ownership of Australian listed companies would be recorded on a publicly accessible register. Prior to the 2016 election, the ALP had proposed establishing a publicly accessible register of the beneficial ownership of all companies and even trusts but its new policy appears less ambitious. Having said that, it is still more extensive than the Treasury Consultation Paper from February 2017 which focussed just on increasing the amount of information held by, and accessible to, Government agencies. The ALP proposes that ownership information would be held in a single publicly accessible central registry;
- the ATO would have to disclose in its Annual Report details of all ‘settlements’ of tax disputes ‘above $50m.’ This might mean any (non-Court) resolution of a dispute where the amount paid in settlement of the action is $50m or more, or it might be referring to a situation where the amount eventually accepted by the ATO was $50m below the amount of the amended assessment; and
- whistleblowers who report to the ATO on entities evading tax would be protected from legal action, and could receive a reward of 1% of any tax penalty imposed on the evader, up to $250,000. In the 2016 Budget the Government proposed similar whistleblower protection (it applied to disclosures of information about ‘tax avoidance behaviour and other tax issues’) but did not include the offer of rewards.
Some of these matters came from the recommendations of the ongoing Senate Economics Committee’s inquiry into Corporate Tax Avoidance which began in 2014 and was revived after the 2016 election.
Hybrid mismatches. One area where the ALP policy and the Government’s policies appear to coincide is in eliminating hybrid mismatches. In the May 2017 Budget, the Government announced a measure targeted at hybrid financial instruments issued offshore by the banking sector. This is not a comprehensive response to hybrids and so we can expect to see further anti-hybrid measures implemented under either party. In fact, the ALP policy might be redundant by the time of the election as Treasury is understood to be well advanced in drafting the Government’s promised comprehensive response to hybrids.
Personal tax issues
Reinstating the Budget Repair Levy. The Budget Repair Levy increased the top personal marginal rate from 45% to 47% for the 2014-15, 2015-16 and 2016-17 income years. (Related changes also affected the FBT rate and some other rates.) The Levy lapsed on 30 June this year. The ALP policy is to re-instate the 47% rate as a permanent feature of the tax rate scale.
Medicare Levy rate. In the May 2017 Budget, the Government announced that it would increase the Medicare Levy from 2% to 2.5% from 1 July 2019 in order to fund the National Disability Insurance Scheme. The ALP announced that it would support the measure but only for the top 2 income brackets. The Government has not yet introduced a Bill into Parliament to give effect to this measure but the legislation can be expected to face opposition in Parliament. The ALP has yet to declare whether it would try to repeal the increase if the Government manages to secure passage of the Bill.
Discretionary trust distributions. The ALP has announced a proposal to impose ‘a standard minimum 30 per cent tax rate for discretionary trust distributions to … people over the age of 18.’ This announcement should look familiar – it is similar to a policy that was examined and then abandoned by both Peter Costello and Joe Hockey – but the ALP has tried hard to downplay its significance by insisting that it is just a modest extension to the regime for people under 18 introduced by John Howard in 1979.
There will need to be a lot more detail before anyone can be confident about just how the regime will operate: some aspects of the policy are clear, others are not (the announcement emphasises why this is being done rather than how):
- The proposal refers to ‘discretionary’ trusts no doubt in the belief that this is a well-understood term. It presumably includes trusts where the amounts attributed to beneficiaries in any year can be affected by a decision of the trustee, but it may extend to other situations such as trusts with takers-in-default, other kinds of discretions such as the discretion to retain income or a discretion to classify certain kinds of receipts as income or capital. The announcement says that ‘fixed trusts’ are excluded but history suggests that only trusts which qualify as AMITs can be confident of being fixed trusts.
- The policy is limited just to distributions to individuals and so presumably there should be less scope for the proposal to affect any business trusts which might fall within the term ‘discretionary’ when it is expressed as law. But, even so, there will likely still be some business trusts caught up in this regime: some employee share trusts, for example, may be affected.
- The 30% tax on distributions will be a semi-final tax. For low income individuals, there will apparently be no reconciliation against the individual’s actual tax liability for the year so that the 30% rate always applies to low income earners’ discretionary trust income. But for high income individuals, the ALP briefing note says a ‘higher rate would apply.’ This means that discretionary trusts will not be available to shelter income at a 30% rate in the way that companies can. And presumably income to which no beneficiary is presently entitled will still be taxed at the top personal marginal rate.
Negative gearing of real estate and shares. The ALP took to the 2016 election a policy to wind-back access to negative gearing. If the policy were implemented:
- any net loss from real estate would be deductible against wage income only if the loss is attributable to the ownership of newly-constructed housing;
- net losses from investments in real estate and from investments in shares could only be used to offset net income from other investments;
- unused losses would be carried forward to offset any capital gain on the sale of the investment; and
- existing investments on foot on the date of commencement of the new measures would be unaffected.
CGT discount. The ALP will halve the CGT discount rates available to individuals for all assets purchased after the commencement of the new policy. That is, the CGT discount available to individuals for assets held longer than 12 months would decline to 25%. Existing investments held on the date the new policy commences would not be affected.
However, there will be no change to either:
- the 33% CGT discount available to superannuation funds; or
- the various CGT discounts available to the small business sector.
Costs of securing tax advice. The ALP has proposed that individuals will only be allowed to deduct a maximum of $3,000 for the cost of managing their tax affairs. It remains to be seen whether this announcement will extend beyond the initial focus of the announcement (fees paid to advisers for tax advice) to include other costs incurred in tax compliance – for example, the cost of securing a valuation for tax purposes or the cost of advisers when engaged in a dispute with the ATO.
Superannuation. During the first half of 2016, both major parties proposed competing changes to superannuation in preparation for the 2016 election. The ALP’s measure was income-based – only $75,000 of superannuation pension income could be exempt. The Government’s policy was the asset-based ‘$1.6m transfer balance cap’ regime which began on 1 July 2017 and has probably made that part of the ALP’s proposal largely redundant.
But as recently as last week Bill Shorten was still referring to ‘[ALP] policies to rein in unfair and unsustainable superannuation concessions.’ It seems the ALP has a range of changes in mind:
- the ALP will lower the cap on non-concessional contributions from $100,000 to $75,000 per annum;
- it will lower the income threshold at which concessional contributions are taxed at 30% from $250,000 to $200,000; and
- the ALP has also promised to oppose the First Home Super Saver scheme. A Bill to enact this measure has not yet been introduced into Parliament.
Some measures – which the ALP announced that it would oppose – became law with the passage of the superannuation legislation in November 2016, despite its efforts:
- the ALP opposed allowing catch-up concessional contributions for up to 5 years, available where taxpayers are unable to contribute $25,000 in a single year. This measure will start in July 2018; and
- the ALP opposed allowing almost all taxpayers a tax deduction for making personal superannuation contributions. (A work-test must still be met for contributions by people aged between 65 and 74.) Under the rules prior to July 2017, most employees were not allowed to make additional deductible contributions except through salary sacrifice arrangements.
As the ALP is still criticising these measures, it is possible that the ALP may seek to repeal them if elected.